The Big Get Bigger

Ever since the announcement last October that RSA was acquiring specialty insurer GCAN, industry watchers have been waiting for the other shoe to drop in the form of the next big M&A deal between Canadian insurers. On May 31, that finally happened when Intact, Canada’s largest insurer, purchased the Canadian operations of AXA, the number six insurer as measured by direct written premiums. The deal is worth $2.6 billion and unlike the much smaller RSA/GCAN transaction, this merger has put Intact under the microscope as it must rely on credit to fund half of the purchase as well as issuing over $800 million in new equity.

Moody’s reacted swiftly by placing Intact’s debt and financial strength ratings under review, as did insurance ratings company A.M. Best. However, the equities market shrugged at these moves and in the days following the announcement, Intact Financial Corp.’s shares rose 9% with analysts raising its 12-month projection to $65 (at press time, Intact was trading just above $54 per share).

Indeed, the deal has all kinds of upside for Intact. It increases its market share from 11% to over 16% and dilutes its exposure to the profit-sucking Ontario auto market. Far from surprising, the deal is in line with predictions experts have been making for three years now about further consolidation in the sector. The Canadian P&C market is crowded with over 200 insurers and there’s only so much money to be made. AXA acknowledged as much in the reasons it gave for the deal. “The sale of our Canadian operations comes after several similar transactions and represents a further step in our strategy of redeploying capital towards geographies with higher long term growth prospects” said Henri de Castries, chairman and CEO of AXA in a media release.

For brokers the deal has positives and negatives. On the one hand, one less market is one less choice for consumers. On the other hand, smaller companies feeling squeezed may now be motivated to seek new representation. “We may see some insurers be more aggressive to be represented in a broker’s office,” says Insurance Brokers Association of Ontario CEO Randy Carroll. “Companies may open their doors.”

One thing brokers can be certain of: more deals. Scale is becoming increasingly important in Canada and the recent spate of natural catastrophes in Canada and elsewhere only underlines the need for companies to have the required capital to withstand these losses.